Union Oil Co. of Cal. v. City of Los Angeles

• Decision Date: 06 March 2000
• Docket Number: No. B127816.,No. B130089.,B127816.,B130089.
• Citation: 94 Cal.Rptr.2d 81,79 Cal.App.4th 383
• Court: California Court of Appeals Court of Appeals
• Parties: UNION OIL COMPANY OF CALIFORNIA, Plaintiff and Respondent, v. CITY OF LOS ANGELES, Defendant and Appellant. Litton Systems, Inc., Plaintiff and Respondent, v. City of Los Angeles, Defendant and Appellant.

94 Cal.Rptr.2d 81

79 Cal.App.4th 383

UNION OIL COMPANY OF CALIFORNIA, Plaintiff and Respondent, v. CITY OF LOS ANGELES, Defendant and Appellant.

Litton Systems, Inc., Plaintiff and Respondent, v. City of Los Angeles, Defendant and Appellant.

No. B127816.

No. B130089.

Court of Appeal, Second District, Division 2.

March 6, 2000.

Rehearing Denied March 27, 2000.

Review Denied June 28, 2000.

James K. Hahn, City Attorney, Ronald Tuller, Assistant City Attorney, and Miguel A. Dager, Deputy City Attorney, for Defendant and Appellant City of Los Angeles.

Bewley, Lassleben & Miller LLP, Jeffrey S. Baird, Joseph A. Vinatieri, Kevin P. Duthoy and Jason C. DeMille; Whittier, for Plaintiff and Respondent Union Oil Company of California.

Victoria T. McGhee, William Christopher Black, Stephen F. McAndrew, Dani H. Rogers, Woodlands Hills, and Craig M. McCabe, for Plaintiff and Respondent Litton Systems, Inc.

Ajalat, Polley and Ayoob, Charles R. Ajalat, Terry L. Polley and Richard J. Ayoob, Los Angeles, as Amici Curiae on behalf of Plaintiff and Respondent Union Oil Company of California.

BOREN, P.J.

The City of Los Angeles (hereinafter, the City) appeals from a judgment awarding approximately $3 million (plus interest and attorney fees) in an action brought by Union Oil Company of California (hereinafter, UNOCAL) for a refund of business taxes paid to the City for tax years 1993, 1994 and 1995.¹ Contrary to the City's contention, as the trial court properly found, the City's taxing scheme violates state and federal constitutional proscriptions against restraint of commerce with respect to in-city manufacturers selling outside the City.² However, UNOCAL is not entitled under 42 United States Code sections 1983 and 1988 to an award of attorney fees incurred in vindicating its rights under the Commerce Clause of the federal Constitution. (U.S. Const., art. I, § 8, cl.3.)

FACTUAL AND PROCEDURAL SUMMARY

The City imposes two alternative taxes upon those engaging in business within its borders. The primary tax is generally referred to as the "business tax," which is set forth in Los Angeles Municipal Code, sections 21.50 through 21.198, and includes a tax on wholesale manufacturing and selling. (L.A.Mun.Code, § 21.166.) A secondary tax, which is an alternative tax to the business tax, is referred to as a "payroll expense tax" and is assessed against the in-city payroll expenses of businesses operating within the City. (L.A.Mun.Code, §§ 21.11.1-21.11.7.)

UNOCAL manufactures and sells petroleum products. As a result of its business activities conducted within the City, UNCAL paid a business tax on the following three aspects of its in-city business: (1) gross receipts from the sale of products manufactured and sold by it within the City (so-called in-to-in); (2) gross receipts from the sale of products manufactured by it within the City but sold outside of the City (so-called, in-to-out); and (3) gross receipts from the sale of products manufactured by it outside the City but which it sold within the City (so-called, out-to-in).

In the proceedings below, the trial was without a jury and based upon stipulated facts. UNOCAL sought a refund of business taxes paid by it with respect to gross receipts from its in-to-out and out-to-in sales activities. The City now, however, does not contest and has paid UNOCAL a tax refund for its out-to-in sales. UNCAL did not seek a refund of taxes paid by it for its in-to-in sales. Therefore, the only business taxes at issue for which UNOCAL now seeks a refund are those paid by it on its in-to-out sales.

The trial court's statement of decision analyzed and applied the reasoning in General Motors Corp. v. City of Los Angeles (1995) 35 Cal.App.4th 1736, 42 Cal.Rptr.2d 430 (hereinafter, G.M. v. Los Angeles), involving an analogous tax scheme with manufacturing and selling taxes, and awarded UNOCAL a full refund of business taxes paid by it on its in-to-out sales. The trial court entered judgment in favor of UNOCAL, including an award of attorney fees.

DISCUSSION

I. The City's taxing scheme is an unconstitutional restraint on commerce with respect to "in-to-out" transactions.

The payroll business license tax scheme at issue here has two separate taxing ordinances and a specific exemption. The two distinct taxes are the payroll tax³ and the business license tax⁴ (which itself is composed of alternative taxes, measured by gross receipts, such as the taxes on manufacturing, the taxes on selling, the taxes on service, etc.). The business license tax is the City's primary tax. The payroll tax was thereafter enacted in 1984, many years after the business license tax was in effect, with the apparent intent to include some taxpayers who were exempt under the business license tax.⁵

In enacting the payroll tax, if the City had limited it only to the taxpayers it attempted to add, such selective discrimination may have come under adverse constitutional scrutiny. Perhaps for this reason, the City imposed the payroll tax on all taxpayers. But, to mitigate the burden on taxpayers, and arguably to obviate a politically unacceptable tax increase, the City provided for an exemption from the business license tax for taxpayers required to pay the payroll tax, and vice versa. (L.A.Mun.Code, §§ 21.11.14, 21.11.15, 21.24.)

The tax scheme in the present case is analogous to that discussed by Division Four of this court in G.M. v. Los Angeles, supra, 35 Cal.App.4th 1736, 42 Cal.Rptr.2d 430. There, the court found that the City had a separate tax on selling and a separate tax on manufacturing, and that local manufacturers who paid a manufacturing tax were exempted from the selling tax. The exemption was implied, unlike the payroll tax and business license tax scheme here, which has separate taxing ordinances and a specific exemption.

The court in G.M. v. Los Angeles, supra, 35 Cal.App.4th 1736, 42 Cal.Rptr.2d 430, held that a tax scheme under which a manufacturer selling in the City pays a selling tax if it is located out of the City, but not if the manufacturer is located in the City, unconstitutionally discriminates. Los Angeles Municipal Code, section 21.166 thus "on its face" discriminated "per se" in favor of local manufacturers and against manufacturers from out of the City, and violated state and federal constitutional proscriptions against restraint on the flow of commerce. (Id. at pp. 1743-1749, 1752, 42 Cal.Rptr.2d 430.) The court analyzed the United States Supreme Court's opinions in Tyler Pipe Industries v. Dept. of Revenue (1987) 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 [hereinafter, Tyler], and Armco, Inc. v. Hardesty (1984) 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 [hereinafter, Armco], and concluded the City cannot exempt some sellers from a tax and impose the tax on other sellers.

As the court explained in G.M. v. Los Angeles, supra, 35 Cal.App.4th at pages 1748-1749, 42 Cal.Rptr.2d 430: "There are no relevant differences among the taxing schemes of West Virginia [discussed in Armco], Washington [discussed in Tyler], and the City of Los Angeles. In all three there is a separate tax on manufacturing and a separate tax on selling with the local manufacturer functionally or actually exempted from the selling tax. As a consequence, notwithstanding any differential in the actual rate or amount of tax, they are discriminatory on their face in favor of in-city manufacturers. This is so even though section 21.166 [of the Los Angeles Municipal Code] provides dual categories subject to taxation, one referring to `manufacturing and selling' and the other referring to `selling' only. The labels applied to different taxpayers are not determinative if the practical effect of the taxing scheme is to impose a heavier tax burden on out-of-city businesses that compete within the city market than it imposes on residents that also engage in commerce within the city. [Citation.] Here, as in Armco, the local manufacturer pays the manufacturing tax but not the selling tax. Consequently, the city's taxing scheme discriminates against all other manufacturers that must pay the tax on selling. On its face, section 21.166 is discriminatory."

Likewise, in the present case, the tax scheme involving the payroll tax and the business license tax violates the direct discrimination test. The tax scheme directly discriminates against interstate and inter-city taxpayers doing business in the City. A Los Angeles business paying the payroll tax in Los Angeles is exempt from the business license tax (L.A.Mun.Code, § 21.24) although the intercity or interstate business performing the same activity in the City must pay the business license tax. Such a tax scheme suffers from the same type of unconstitutional discrimination found in G.M. v. Los Angeles.

In addition to applying a direct discrimination test and finding facially unconstitutional Los Angeles Municipal Code section 21.166, the court in G.M. v. Los Angeles extended its analysis to test the discriminatory code provision for internal consistency. As the court explained: "The internal consistency test is a federal doctrine that requires the court to assume that all taxing jurisdictions have a taxing scheme exactly the same as the taxing scheme under review. With that assumption in mind, General Motors argued that it, as an out-of state manufacturer selling in Los Angeles, is subjected to two taxes: a selling tax imposed by Los Angeles and a manufacturing tax imposed by the jurisdiction where its manufacturing facility is located. In contrast, a Los Angeles manufacturer selling in Los Angeles pays only a manufacturing tax. A Los Angeles manufacturer pays two taxes when it sells outside of the city — one on 100 percent of its gross receipts as an in-city manufacturer and a second on its apportioned gross receipts according to its selling activity in the jurisdiction where the sale occurs.... In the simplest terms, an additional tax is imposed only because and only...